Australia: Introduction of the Exploration Development Incentive (EDI) tax credits

Tax Legal Insight
Last Updated: 9 July 2014
Article by Betsy-Ann M. Howe and Adam Levine

In the 2014 Budget, the Federal Government announced that it would introduce Exploration Development Incentive (EDI) tax credits to encourage and stimulate growth in the junior mining industry. This is a simpler approach to other incentives previously considered and similar to that used by Canada in relation to its tax incentives for mineral exploration.

The measure had previously been outlined in the Coalition's Policy for Resources and Energy and a Treasury discussion paper had been released in March 2014. Further details of the scheme have just been released which, once implemented, will apply retrospectively from 1 July 2014. The EDI is designed to allow shareholders in certain junior miners to receive tax credits for expenditure incurred by the company, and apply those tax credits against the shareholder's own personal tax liability. The tax credits will be available to all shareholders or, at the election of the company, only to holders of shares issued after 30 June 2014.

Draft legislation has not yet been released, but the Government has undertaken to further consult with stakeholders in relation to the design of the measures.

A welcome development for the junior mining industry

The introduction of the EDI will come as welcome news to junior exploration companies who are looking for ways to fund mining exploration in Australia. Recent figures from the Australian Bureau of Statistics show that since mineral exploration in Western Australia (WA) peaked at AUD603 million in the June quarter of 2012, it has fallen by two thirds to AUD206.2 million in the March quarter of 2014 which means that mineral exploration across WA is now at its lowest level since the March quarter of 2007. This is largely due to the difficulties in raising the necessary funds – either from debt or equity. The introduction of the EDI is likely to spark great interest from investors seeking tax benefits for investing in junior exploration companies.

EDI eligibility

The EDI will only be available to "disclosing entities", being listed companies and certain widely held unlisted companies. Companies with no taxable income will be eligible for the EDI. However, the scheme will exclude companies that have commenced resources production as well as companies connected or affiliated with an entity that has commenced resources production. It is unclear how the "affiliation or connection" test will be applied in practice, though this would likely exclude exploration ventures of corporate groups that include a production component. Participation in the EDI is voluntary.

How will shareholders benefit?

Companies participating in the EDI and providing exploration credits to shareholders will need to make an irrevocable choice to either provide exploration credits to all shareholders, or only to holders of shares issued after 30 June 2014. This choice is intended to allow the company to decide which option best assists it in continuing to explore for new mineral deposits.

Where an entity elects to provide exploration credits to holders of shares issued after 30 June 2014, any shares issued by the entity after 30 June 2014 will need to be traded as a separate class of shares given that the rights and restrictions attaching to shares issued after 30 June 2014 will be different to the entity's other classes of shares. In order for the separate class of shares to be quoted and traded on the Australian Securities Exchange (ASX), the entity will need to apply to ASX for the quotation of the securities and meet the relevant conditions set out in the ASX Listing Rules.

Administratively, an entity will need to maintain adequate records of those shareholders who are entitled to receive tax credits under the EDI.

What expenditure will be eligible?

The EDI will apply to eligible greenfields exploration expenditure incurred from 1 July 2014. This will broadly include expenditure incurred on activities for the purpose of determining the existence, location, extent or quality of a new mineral resource in Australia on land the subject of an exploration licence.

So that the definition does not extend beyond greenfields exploration, the definition would not include expenditure on activities normally associated with feasibility, including activities aimed at determining whether it is economically (including technically) feasible or commercially viable to proceed to development, or how best to develop a known mineralisation, would be excluded from the EDI.

Specifically, activities covered will include geological mapping, geophysical surveys, systematic search for areas containing minerals, except petroleum or quarry materials, and search for minerals by drilling or other means for such minerals within those areas. The EDI will only apply to expenditure on exploration for minerals in Australia and will not apply to exploration for:

  • quarry materials
  • shale oil
  • petroleum, including coal seam gas, and any naturally occurring hydrocarbon or naturally occurring mixture of hydrocarbons, whether in a gaseous, liquid or solid state
  • geothermal energy resources.

Capping the EDI

As announced in the 2014 Budget, Government expenditure in relation to EDI credits will be capped at AUD25 million for exploration expenditure incurred in 2014, AUD35 million for exploration expenditure incurred in 2015-16 and AUD40 million for exploration expenditure incurred in 2016-17. In order to ensure the caps are not breached, an "ex-post modulation approach" will be applied by the Australian Taxation Office (ATO).

In broad terms an ex-post modulation would require companies to notify the ATO of their 'eligible loss' and eligibility for the scheme in respect of the previous financial year (the expenditure year), and lodge their tax return by a cut-off date, for instance 1 March following the expenditure year. The ATO would then calculate the total 'eligible losses' reported for the expenditure year. If the total exploration credits that would result from the 'eligible losses' exceed the cap set by the Government for the expenditure year, the ATO would calculate an appropriate modulation factor (so that the cap is not exceeded) and advise eligible companies of the proportion of their 'eligible losses' they will be entitled to provide to shareholders as exploration credits.

Companies will not be able to flow through the benefit of more than their 'available loss', that is, the modulation factor multiplied by their expenditure year 'eligible loss'.

While this approach was considered to be the least administratively complex, and would enable an earlier start to the EDI, it does mean that investors are unlikely to be able to determine the quantum of the exploration credit if they were to invest in the expenditure year unless they are able to reliably estimate both the company's likely 'eligible loss' and total 'eligible losses' for all eligible companies in that year.

Companies seeking to raise capital from investors on the basis that the funds will be used for eligible greenfields exploration under the EDI and thereby offering tax credits to such investors, will need to ensure that any offer document fully and adequately outlines what the funds raised will be used for. For example, it is common that the proceeds of funds are used for a variety of purposes including, exploration, capital expenditure and the costs of the offer. If it is intended that the money raised from the capital raising will fund costs other than exploration, investors will not be able to claim tax credits for such expenditure as it is not eligible expenditure under the EDI. There will also need to be proper disclosure in the fundraising documentation around the EDI regime.

It will be important for entities participating in the EDI to keep adequate, detailed and up to date records of its eligible greenfield exploration expenditure including payments into and out of its EDI accounts.

The treatment of exploration credits

Companies wishing to provide credits to shareholders will need to make adjustments to tax losses by reducing the amount of the tax loss available to carry forward by an amount equivalent to the credits it wishes to provide to its shareholders. In effect, the rules will allow shareholders to realise the benefit of expenditure in the form of credits, as opposed to the expenditure sitting in the company as a tax loss.

Australian resident shareholders will be entitled to refundable tax offsets equal to the exploration credits they receive. However whilst foreign resident shareholders will also receive the credits, they will not be entitled to use them. Exploration credits will flow through trusts and partnerships in a manner consistent with the rules applying to franking credits. Likewise, corporate shareholders will receive similar benefits to those they obtain under the rules that apply to franking credits.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

K&L Gates has been awarded a 2012 EOWA Employer of Choice for Women citation acknowledging our commitment to workplace diversity.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions